With the UK facing unprecedented political uncertainty and economic volatility, risk managers are under an increasing amount of pressure to mitigate the impact of external forces on their organisations.
Below we consider 5 of the key challenges that risk managers are likely to face in 2019:
1. Brexit Uncertainty
Although we are currently in the eye of the Brexit storm with no deal as yet finalised and the original exit date of 29th of March looking less likely, the full impact of leaving the EU will not be evident for years to come. However, in the short-term, it seems there could be a severe shock if no deal is agreed and even with a deal, prospects for financial services are not looking rosy.
While there may well be opportunities in terms of ‘global deals’ promised by being outside the EU, financial services – the UK’s star economic performer - looks likely to lose out. A number of relocations and transference of business projects are underway from London to European cities such as Frankfurt, Paris and Dublin.
There may be special arrangements announced for financial services in terms of market access or ‘passporting rights’ but the chaotic Brexit process has been bad news for financial markets as seen by falls in the value of sterling. If we get through to the other side, then firms can expect a raft of new legislation since we will no longer be subject to EU laws. While it is expected the UK be in close alignment with Europe, nothing is certain. A further point is the skill shortage that may occur if there are steep curbs on immigration.
2. Senior Managers & Certification Regime
The SMCR marks a major shift, placing far more emphasis on individual responsibility. It seeks to address the failings that contributed to the financial crisis of 2008 and significantly raise standards of personal accountability. Failure to meet these could result in fines and sanctions and potentially being banned from the industry.
After first being introduced for banks in 2016, the regime is now in force for insurers and by the end of next year, it will be extended to all regulated firms. The onus on individual behaviour is a new approach and could indeed prove extremely challenging. Indeed, the FCA is expected to use the regime to monitor firms on wider aspects of behaviour than in the past, such as workplace bullying, sexual harassment or where a lack of integrity is shown.
3. Emergence of AI Solutions
Financial services firms are increasingly dependent on their technology and there is growing emphasis on AI solutions. Given that Brexit may exacerbate staffing issues and the need to drive down costs has led to the rise of the robo-adviser and use of machine learning solutions in areas like insurance claims.
As machines increasingly interact with customers and make more decisions, risk managers need to keep pace with its advance and ensure that the potential for increased data security challenges are taken on board. That said, AI technology promises huge process efficiency advantages in 2019 and also has huge potential to assist first line of defence users as well as risk managers in their day to day roles.
4. Cyber Crime Awareness and Management
There has been progress made in the war on cyber crime with greater awareness of phishing techniques and other scams. Even so, the FCA has said that regulated firms are struggling in their responses to cyber risks. Its report in December which looked at the asset management and wholesale banking sectors, found weaknesses and it called on firms to develop a ‘security culture’ within the business to repel external threats and those posed by malicious insiders.
There remains a need for risk managers to have cyber awareness high on the agenda as criminals continue to use more sophisticated approaches when it comes to hacking and falsifying information. Notably, the increase in use of Internet of Things devices poses further risk since these could make a breach more likely and they cannot be patched or updated.
5. Changes to Employment Legislation and Practices
Risk managers must ensure their firms are up to date on modern employment practices such as those in the Taylor review. Last summer it was noted that Acas had seen a 39% rise in the number of cases that had gone to an employment tribunal – the rise is largely attributed to the fact that fees were abolished in 2017.
In addition, the government has announced further employment reforms, and these include repealing the ‘Swedish derogation’, a legal loophole that allows agency workers to earn less than equivalent permanent employees.
New legislation is also expected to requiring employers to provide a statement of rights on the first day of employment setting out entitlements. There are also plans to quadruple the maximum employment tribunal fine from £5,000 to £20,000.
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